Greater consumption at gas pump?

Lower gas prices have consumers responding.

On the road again! Maybe we might just have a summer driving season after all. The Energy Information Administration shocked the market by reporting that American responded to the dramatic two-week drop in gas prices by topping off their tank in the biggest weekly jump in gas demand since before the Thanksgiving Day holiday

David Bird of Dow-Jones laid it out beautifully when he wrote that "U.S. implied gasoline demand jumped 4.4% last week to 8.75M barrels/day, the biggest increase and demand level since the typical pre-Thanksgiving surge in 2012. Gasoline output and imports rose and while estimates of exports fell. The increased demand helped result in a U.S.-supply drop that was 10 times expectations--logging the biggest decline in a year--and put inventories at 24.9 days of use, a 5-month low and compared with a 5-year average of 23.8 days for the week. Gasoline demand for this month is seen being flat by the EIA.”

The jump in gas demand may mean consumers are responding to lower gas prices. That gave the crude oil a boost at it fueled speculation that refiners would pay up for crude to meet the increase in demand. Refinery runs feel more than expected to 85.7 caused by refinery outages and problems. They should bounce back big increasing the demand for oil. And even if crude rebounds the gas prices may not bounce back as quickly as you might think. Reuters reported that the Genscape, the pipeline monitoring service, is seeing increased flows on the BP1 pipeline to near 172,000 bpd from an estimated 86,000 bpd. Increased power consumption was observed at the Blake pumping station beginning at approximately 12:30PM (EST) followed by the Blake pumping station at approximately 1:30PM (EST) yesterday.

The reason this is important is that it may be a sign that the BP refinery in Whiting Indiana may be ramping up production. This refinery has been at reduced runs as they work to replace a crude unit increasing its ability to refine heaver Canadian crude. This has kept upward pressure on retail gas prices in the Midwest.

Genscape said that this is the first time flow has increased above 160,000 bpd for more than 1.5 hours since the flow decreased Saturday Nov 3, 2012. The Nov 3, 2012 decrease in flows was followed by the shutdown of the 250,000 bpd CDU at the BP - Whiting refinery Nov 4, 2012.

Natural gas had its third down day as profit taking and the fact that oil rallied hard! As I have written before and as Goldman Sachs has written, natural gas has a safe haven aspect to it. Traders use natural gas as a pure energy hedge versus crude. Risk on crude rallies and gas falls. Risk off crude falls and natural gas rallies.

Yet as I have said before the long term outlook for this market looks better and better every day. Just yesterday Reuters News reported that lower U.S. power prices trim revenue for nuclear reactors. That may be another reason that gas demand could rise more than many think. Reuters says that " Lower wholesale power prices in the U.S. Midwest and Mid-Atlantic regions have reduced the amount of money available to nuclear power generators, the U.S. Energy Information Administration (EIA) said in a report Wednesday. Since 2012, EIA said quark spreads, which measure the potential profitability of nuclear power plants, in the Midwest and Mid-Atlantic have ranged from about $10 to $35 per megawatt-hour (MWh). Quark spreads in 2008 ranged from $20 to $90 per MWh.

A quark spread is the difference between the wholesale electricity price received by a nuclear plant and the cost of fuel needed to generate the electricity.

EIA said the quark spreads were down primarily due to weaker natural gas prices. In many parts of the United States, natural gas fired plants set the price of power paid to all generators. Natural gas and power prices in 2012 reached decade lows in part due to record shale production.

EIA said the estimated average national fuel costs in 2011 for coal and natural gas plants were $25/MWh and $36/MWh, respectively. Nuclear fuel however costs averaged only $6/MWh. So, EIA said, nuclear plants generally produce more revenue net of fuel cost on a dollar-per-megawatt basis than coal- or natural gas-fired plants.

EIA said the recent narrowing of quark spreads may affect investment decisions for plants that anticipate major capital expenditures or increasing operating and maintenance costs in the near future. Nuclear plants owned by vertically integrated utilities under cost-based state regulation may be in a better position to recover increases in plant expenses by passing them through directly to ratepayers, EIA said.

But EIA warned that merchant nuclear plants are more directly reliant on the wholesale electricity market for the revenue necessary to recover these costs. Already U.S. power company Dominion Resources Inc <D.N> said it would shut its Kewaunee nuclear plant in Wisconsin later this spring, 20 years before its operating license expires, due in part to weak market conditions. Kewaunee is a merchant nuclear plant. Other operators of merchant nuclear power plants include Exelon Corp <EXC.N>, Entergy Corp <ETR.N>, NextEra Energy Inc <NEE.N> and Public Service Enterprise Group Inc <PEG.N>.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.